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Benko: Broken Promises—The Unhappy 40th Anniversary of the Nixon Shock

Richard Nixon
Gianni Ferrari | Cover | Getty Images
Richard Nixon

Today is the 40th anniversary of the announcement by President Nixon of a New Economic Policy, the so-called “Nixon Shock.”

President Nixon, faced with rising inflation and the threat of a recession, imposed wage-price controls, built a tariff barrier around the USA, and “temporarily” suspended the convertibility of the dollar into gold.

It was, by results, the greatest debacle in the history of American economic policy.

What followed was not pretty. All of the Nixon Shock policies, save one, were quickly unwound by his more economically astute senior policy makers. The tax credits expired. Wage-price controls were allowed to implode. The tariff wall came down faster than you can say, “Mr. Nixon, tear down this wall!” All were unwound, that is, except one.

The only vestige of the Nixon Shock remaining was, arguably, the most damaging and it is still doing great damage.

The gold window is still closed.

The gold standard has a long and colorful history.

For all of its imperfections what cannot be disputed seriously is that, notwithstanding its bungled handling from time to time, the record demonstrates that the gold standard is, as financier and philanthropist Lewis E. Lehrman (with whom this writer is professionally associated) has observed, the least imperfect of all monetary systems that have ever been tried in the laboratory of history.

Why is it the best? Yes, it has a distinguished pedigree going back to Sir Isaac Newton and even Copernicus, and was firmly embraced by America’s founders. But that’s not why. The reason is simple. The gold standard is one of the greatest engines of job creation and real prosperity known.

Nixon’s televised address to the nation broadcast on August 15, 1975 said, in relevant part:

"The third indispensable element in building the new prosperity is closely related to creating new jobs and halting inflation. We must protect the position of the American dollar as a pillar of monetary stability around the world.

In the past 7 years, there has been an average of one international monetary crisis every year...

I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.

Now, what is this action—which is very technical—what does it mean for you?

Let me lay to rest the bugaboo of what is called devaluation.

If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.

The effect of this action, in other words, will be to stabilize the dollar."

Well, to quote a favorite catchphrase of President Nixon: “Let me make one thing perfectly clear.”

Gold bars
Tom Grill | Iconica | Getty Images
Gold bars

The number and intensity of international monetary crises has risen dramatically.

The temporary suspension now is entering its 41st year. It is even less “temporary” than Moses’s interminable shepherding of the Children of Israel through the Sinai desert was “temporary.”

The dollar today is worth about 19 cents in 1971 dollars. So much for the promise of the dollar being “worth just as much tomorrow as today.”

The dollar, far from being a “pillar of monetary stability around the world,” notoriously is a source of instability, resentment, and even embarrassment for America.

Far from creating jobs, America’s unemployment rate, currently stuck above 9% (or by some, even liberal, accounts, 16% — Great Depression levels), has averaged dramatically higher since Nixon repudiated the gold standard than in the era where even the last, diluted, remnants of the gold standard, the “Bretton Woods” system, remained in effect.

As former financier, now social critic, Charles W. Kadlec, an advisor to the American Principles Project and to The Lehrman Institute’s last October in The Wall Street Journal:

“From 1947 through 1967, the year before the U.S. began to weasel out of its commitment to dollar-gold convertibility, unemployment averaged only 4.7% and never rose above 7%. Real growth averaged 4% a year. Low unemployment and high growth coincided with low inflation. During the 21 years ending in 1967, consumer-price inflation averaged just 1.9% a year. Interest rates, too, were low and stable—the yield on triple-A corporate bonds averaged less than 4% and never rose above 6%.

What's happened since 1971, when President Nixon formally broke the link between the dollar and gold? Higher average unemployment, slower growth, greater instability and a decline in the economy's resilience. For the period 1971 through 2009, unemployment averaged 6.2%, a full 1.5 percentage points above the 1947-67 average, and real growth rates averaged less than 3%. We have since experienced the three worst recessions since the end of World War II, with the unemployment rate averaging 8.5% in 1975, 9.7% in 1982, and above 9.5% for the past 14 months.”

Thirty years ago, this writer was called by the Treasury Department of the United States to testify before the Gold Commission on the constitutional history of American monetary policy. The record is unambiguous that those who wrote, adopted, and governed the young United States under the Constitution abhorred paper moneyinconvertible into precious metals. There is no question that statesmen including George Washington, Alexander Hamilton, Thomas Paine, John Adams, Thomas Jefferson, and, in a later epoch, men such as Daniel Webster condemned in the strongest possible terms the monetary course upon which President Nixon set America, and the world.

Forty years of sluggish growth, “great” recessions, and lousy job creation is too long. Now is the time for our president, our senior financial officials such as Treasury Secretary Geithner and Fed Chairman Bernanke, and for the Congress to restore gold convertibility, and with it, jobs, prosperity, and a balanced budget.

Ralph Benko, an attorney and former junior Reagan White House official, is the senior advisor, economics to the American Principles Project’s Gold Standard 2012; editor of The Lehrman Institute’s definitive gold standard website; weekly contributor of “A Golden Age” to Forbes.com; proprietor of Facebook’s Gold Standard page, and a member of the Tea Party Patriots.